Small-Caps in Big Danger

U.S. small-cap stocks have handily beat large-cap names over the past year. Now, however, signs suggest the good times may end.

Small U.S. companies have generated plus-size stock returns over the past year, but last month they lagged the market. That may be the start of a slump.

Small companies look expensive relative to large ones and historical averages. Their limited foreign exposure once worked to their advantage but is now becoming a drag. And the small-company universe has outsize exposure to housing, which has enjoyed a brisk recovery but is now...